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Income Taxes

12 Months Ended

Jul. 31, 2015

Income Taxes [Abstract]

Note 15—Income Taxes

The components of income from continuing operations before income taxes are as follows:

Year ended July 31 (in thousands)		2015				2014				2013
Domestic		$	7,538			$	21,624			$	44,355
Foreign			84,665				3,368				(10,405	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		$	92,203			$	24,992			$	33,950

Significant components of the Company’s deferred income tax assets consist of the following:

July 31 (in thousands)		2015				2014
Deferred income tax assets:
Bad debt reserve		$	550			$	2,188
Accrued expenses			4,629				2,937
Stock options and restricted stock			1,030				2,131
Charitable contributions			1,277				1,230
Impairment			25,746				25,745
Depreciation			7,232				7,566
Unrealized gain			138				163
Net operating loss			125,223				126,093
Credits			2,892				3,123
Total deferred income tax assets			168,717				171,176
Valuation allowance			(155,393	)			(151,975	)
DEFERRED INCOME TAX ASSETS, NET		$	13,324			$	19,201

The provision for income taxes consists of the following:

Year ended July 31 (in thousands)		2015				2014				2013
Current:
Federal		$	—			$	(279	)		$	671
State and local			—				—				148
Foreign			(311	)			(1,177	)			(1,431	)
			(311	)			(1,456	)			(612	)
Deferred:
Federal			(1,967	)			(6,461	)			(14,181	)
State and local			(245	)			(175	)			(1,079	)
Foreign			(3,565	)			4,110				—
			(5,777	)			(2,526	)			(15,260	)
PROVISION FOR INCOME TAXES		$	(6,088	)		$	(3,982	)		$	(15,872	)

In fiscal 2014, the Company determined that its valuation allowance on the losses of IDT Global, a U.K. subsidiary, were no longer required due to an internal reorganization that generated income and a projection that the income would continue. The Company recorded a benefit from income taxes of $4.1 million in fiscal 2014 from the full recognition of the IDT Global deferred tax assets.

The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as follows:

Year ended July 31 (in thousands)		2015				2014				2013
U.S. federal income tax at statutory rate		$	(32,271	)		$	(8,747	)		$	(11,883	)
Valuation allowance			—				4,110				—
Foreign tax rate differential			25,757				961				(5,073	)
Nondeductible expenses			659				761				714
Other			(73	)			7				50
Prior year tax (expense) benefit			—				(960	)			921
State and local income tax, net of federal benefit			(160	)			(114	)			(601	)
PROVISION FOR INCOME TAXES		$	(6,088	)		$	(3,982	)		$	(15,872	)

At July 31, 2015, the Company had federal and state net operating loss carryforwards of approximately $170 million. This carry-forward loss is available to offset future U.S. federal and state taxable income. The net operating loss carryforwards will start to expire in fiscal 2016, with fiscal 2015’s loss expiring in fiscal 2036. The Company has foreign net operating losses of approximately $173 million, of which approximately $117 million does not expire and approximately $56 million expires in two to nine years. These foreign net operating losses are available to offset future taxable income in the countries in which the losses were incurred. The Company’s subsidiary, Net2Phone, which provides voice over Internet protocol communications services, has additional federal net operating losses of approximately $84 million, which will expire through fiscal 2027. With the reacquisition of Net2Phone by the Company in March 2006, its losses were limited under Internal Revenue Code Section 382 to approximately $7 million per year. The net operating losses do not include any excess benefits related to stock options or restricted stock.

The Company has not recorded U.S. income tax expense for foreign earnings, as such earnings are permanently reinvested outside the United States. The cumulative undistributed foreign earnings are included in accumulated deficit in the Company’s consolidated balance sheets, and consisted of approximately $353 million at July 31, 2015. Upon distribution of these foreign earnings to the Company’s domestic entities, the Company may be subject to U.S. income taxes and withholding of foreign taxes, however, it is not practicable to determine the amount, if any, which would be paid.

The change in the valuation allowance is as follows:

Year ended July 31 (in thousands)		Balance at beginning of year				Additions charged to costs and expenses				Deductions				Balance at end of year
2015
Reserves deducted from deferred income taxes, net:
Valuation allowance		$	151,975			$	3,418			$	—			$	155,393
2014
Reserves deducted from deferred income taxes, net:
Valuation allowance		$	167,328			$	—			$	(15,353	)		$	151,975
2013
Reserves deducted from deferred income taxes, net:
Valuation allowance		$	204,977			$	462			$	(38,111	)		$	167,328

The table below summarizes the change in the balance of unrecognized income tax benefits:

Year ended July 31 (in thousands)		2015				2014				2013
Balance at beginning of year		$	—			$	356			$	—
Additions based on tax positions related to the current year			—				—				—
Additions for tax positions of prior years			—				—				356
Reductions for tax positions of prior years			—				—				—
Settlements			—				(356	)			—
Lapses of statutes of limitations			—				—				—
Balance at end of year		$	—			$	—			$	356

At July 31, 2015, the Company did not have any unrecognized income tax benefits and did not expect any changes in the next twelve months. If the Company recognized any unrecognized income tax benefits, it would affect the effective tax rate. In fiscal 2015, fiscal 2014 and fiscal 2013, the Company did not record any interest and penalties on income taxes. As of July 31, 2015 and 2014, there was no accrued interest included in current income taxes payable.

The Company currently remains subject to examinations of its tax returns as follows: U.S. federal tax returns for fiscal 2012 to fiscal 2015, state and local tax returns generally for fiscal 2011 to fiscal 2015 and foreign tax returns generally for fiscal 2011 to fiscal 2015.